International Trade Final

Topics: International trade, Mercantilism, Economics Pages: 5 (887 words) Published: March 23, 2015

International Trade Theories

International Trade Theories
International trade entails the exchange of goods and/or services amongst nations. Such economic exchanges have taken place for several centuries and now, more than ever before, all countries are becoming an intrinsic part of the world economy. This has led to the increased usage of concepts such as spaceship earth and global village which reflect the fact that the modern marketplace is fundamentally international. A myriad of theorists have come up with a host of theories over the years in a bid to explain why nations trade with one another and how they try to maximize their gains right from the mercantilism theory which was founded on the believe that countries ought to increase their gold and silver coffers by capitalizing on their exports and decreasing their imports developed in the sixteenth century, to Porter’s Theory developed in 1990s and whose foundation was on the belief that a country’s competitiveness is determined, to a great extent, by its ability to have new innovations and constant upgrading (Bradley, 2011). Absolute Advantage

This theory was advanced by Adam Smith in 1776, as a challenge the mercantile theory of wealth of nations as determined by its gold and silver holdings. Although recent economic theorists have attempted to edit the original version of the theory, its fundamental assertion that nations have an advantage if they produce the goods or services that they are more efficient in when compared to other nations still prevails (Hill, 2013). The notion here is that rather than a nation struggling to produce goods that they may not know how or lack the resources to produce, they should focus on the production of the goods that they are savvy on and use the money they get from exporting the latter to buy the former from nations that are able to produce them efficiently. The implication is that every nation should identify it strengths and focus on producing the goods they can effectively rather than attempting to cut down their imports by producing almost every good they might require. A certain nation is absolutely better in the production of certain goods than are its partners in trade. The theory of absolute advantage assumes that every single nation has at least one good or service whose production cannot be rivalled by any other nation and that both partners will benefit from the trade. If every nation would focus its production energies on the goods and services that they are most efficient on and use some of the money they get to import the other goods they require, it would greatly foster international trade. Such partners exchange the goods they have both produced cheaply and they can enjoy the absolute advantage. Comparative Advantage

The theory was developed by David Ricardo, in 1817, where he enunciated a refinement of Absolute advantage as proposed by Adam Smith (Hill, 2013), by proposing the principle of comparative advantage. This theory was based on the assumption that even if a nation can produce all the goods it requires more efficiently than other nations, it would still benefit from trade. Proponents of this theory believe that every production has opportunity costs and nations should focus on the production of the goods they are most efficient in and relinquish the ones whose production they are least efficient in to the other nations which hold a comparative advantage as far as the production of those goods is concerned (Bradley, 2011). Embracing this theory means that no nation can claim to be self-sufficient and therefore international trade will be fostered. If a certain nation does not produce sugar, for example, it will be careful not to impose prohibitive tariff and non-tariff tools that otherwise discourage foreign competition. Product-Life Cycle Theory

In 1960s, Raymond Vernon advanced the Product-Life Cycle Theory which stated that a product follows...

References: Bradley, M.F. (2011), International Marketing Strategy, Prentice-Hall International,
Hill, C.W.L. (2013), International Business, Competing in the marketplace, 9th Edition.
New York: McGraw-Hill Irwin,
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